Week in Review
Global stocks and bond yields staged a rebound last week, reflecting strong US economic data and hopes that US and China could be edging closer to a trade deal. US 10-year bond yields and the $US appear close to breaking recent end-week highs.
The US economy is humming: with solid consumer, employment and manufacturing reports last week. The ongoing US earnings reporting season also remained good, though a nervous market was quick to sell down companies (like Apple) which warned of a softer outlook. A notable development was a further slump in oil prices, helped by reports of a strong production lift in the US and Saudi Arabia, along with the Trump’s decision to allow some countries (like Japan, India and South Korea) more time to wean themselves off Iranian supplies. China meanwhile has simply ignored US requests, and continues to import oil from Iran. That said, the drop in oil could prove a temporary reprieve given dwindling global spare capacity, solid ongoing demand and America’s apparent resolve to eventually curtail Iranian supply.
Perhaps most critically, as I warned last week, Friday’s US payrolls report did indicate annual growth in average hourly earnings (AHE) broke through the 3% barrier, although at 3.1% it was a touch softer than market expectations. Hurricane effects have perhaps also added some upward bias of late given that its lower wage hospitality workers that tend to lose their jobs. Although wage growth is likely still low enough not to force the pace of Fed tightening, the market is understandably nervous. To my mind, providing annual wage growth holds at no more than 3.5% for the next three to six months at least, interest rate fears are unlikely to escalate a lot further over this period.
In Australia, global risk-on sentiment helped push both equities and bond yields higher. Economic reports last week, however, were generally consistent with the RBA being sidelined for a good deal longer. Indeed, not only was the Q3 consumer price index (CPI) report benign, but home building approvals, house prices and retail spending were also soft.
US mid-term elections are likely to be the market highlight this week, with polls suggesting the Democrats will take control of the House but not the Senate. On balance this may well be greeted with disappointment by Wall Street, as it might dent the chances of further tax cuts – but not necessarily increased infrastructure spending. The Fed and RBA also meet but little action or change in tone from either central bank should be expected. The US earnings season and any further hints regarding the progress of US-China trade talks will also be of interest.
On Friday we’ll also receive the RBA’s Quarterly Statement on Monetary Policy, although I anticipate no significant change to the Bank’s economic or policy outlook.
Have a Great Week!